“The other part of outsourcing is this: it simply says where the work can be done outside better than it can be done inside, we should do it.” —Alphonso Jackson, Former United States Secretary of Housing and Urban Development
Outsourcing is contracting a process task or operation that could be performed by employees within an organization, such as product design or manufacturing, to a third party for a significant time. The term was in the mid-1980s; however, the idea of hiring someone outside an organization to do specialized jobs or divide labor has existed long before then. Thanks to outsourcing, the success of companies now is not limited only to the performance of just its employees and suppliers but a huge network of contract workers and advancing technologies that are no longer limited by time and distance. Due to rising labor costs in the U.S., many companies are outsourcing jobs to underdeveloped companies in hopes of saving money.
The Impact of Outsourcing on Organizational Performance
Outsourcing has become a controversial and sensitive issue in the U.S. and affects every part of business, from manufacturing to design, software development, financial control, logistics management, customer support, and sales.
With the economy driving towards globalization, many companies are trying to find new resources that lower labor costs, introduce unique materials, and provide new market opportunities. Globalization is forcing companies to improve constantly to maintain their competitive edge. In
other words, companies must utilize outsourcing if they are to avoid extinction within the global market.
Building sustainable comparative advantages and competitive flexibility is the major reason for companies to conduct outsourcing strategies. Considering this view global outsourcing will improve the organizational performance.
Does outsourcing really help in enhancing a company’s profitability?
The central question that comes to my mind: Does outsourcing increase the value of the firm that utilizes it and delivers higher profitability? The answer is yes. When viewing it through a political lens, outsourcing is profitable for big companies making them successful, which, in turn, makes the U.S. market more successful. According to UnitedStatesNow, “[Outsourcing] saves money for companies, opens up opportunities for greater entrepreneurship in the U.S., and leads to more Americans holding higher level jobs.” Outsourcing creates a ripple effect in the market economy by lowering production costs, which lowers prices for consumers and allows U.S. consumers to spend more money, injecting income into the federal government through sales tax and trade tax. For businesses, outsourcing, even at the most basic level, enhances organizational performance, as seen in the survey research diagram below on “The Perceived Impact of Outsourcing on Organizational Performance” conducted by Dr. Dean S. Elmuti, Professor at Eastern Illinois University, School of Business. His major research interest is on global issues, supply chain and competitiveness, and energy issues in the United States.
Today, some of the world’s largest companies, such as Sodexo, Google, Nike, Microsoft, and Apple, outsource their manufacturing personnel. The US and some European countries, including the U.K. and Germany, are the main importers in the global outsourcing market. Developing countries such as India have become the largest exporters in the global outsourcing market because of lower labor costs and the ability to communicate in English. India’s cost of living is much lower than the majority of the developed world, which means companies are able to outsource labor and production at a much lower pay rate than they would within the U.S. Additionally, most of India is fluent in English, which allows for clear communication with U.S. businesses.
Is Outsourcing Bad for the U.S. Economy?
There are some who are against overseas outsourcing and argue that hiring manpower from foreign countries adversely affects the U.S. economy and robs thousands of Americans of jobs, especially those who are skilled workers. Their argument is that many customer service jobs, as well as jobs in the information technology sectors (data processing, computer programming, and technical support), and those requiring skilled labor, have been affected by overseas outsourcing.
The idea is that the loss of jobs due to outsourcing leads to a loss of income for local, state, and federal governments. Therefore, there are fewer payroll tax receipts and fewer contributions to Social Security and Medicare, leading to a decrease in sales and other consumer tax revenues.
All of these possible negatives to overseas outsourcing are concerning but do not take into consideration the idea of outsourcing as a whole. Businesses are not just outsourcing labor to foreign countries but also to freelance workers within the U.S. Many jobs can be performed on a freelance basis that cannot function as an overseas outsourcing job. Positions such as Virtual Assistant, Copywriter, and Social Media Manager perform best when the employee is within the same time zone as the employer and able to be on-call to perform duties as needed. As more baby boomers are leaving the workforce in retirement, and more Gen-Zers are entering the workforce, the U.S. is experiencing an influx of technology-fluent workers that prefer to work on a freelance basis. A study done by Edelmen Finance in partnership with Upwork shows that 46% of Millenials and 53% of Gen. Xers polled consider freelance work to be a long-term career choice. 64% of working Gen. Zers (ages 18-25) polled look to freelance work to make money quickly. In fact, freelance workers as a whole make an average of $28 per hour, which is 70% higher than other U.S. workers in a traditional position.
Freelance workers are not only making more per hour than the average U.S. worker, but they are also working from home, which cuts on living expenses such as car payments and fuel costs. More money in the freelancer’s pocket means increased spending and government tax funding. Some can argue that overseas outsourcing has the potential to ultimately eliminate the entry-level jobs that many within the U.S. qualify for, but while many traditional entry-level jobs, such as those in the manufacturing or customer service industries, are being outsourced to a foreign workforce, and equal or greater amount of new jobs within the I.T. and Business Management sectors are being created and filled within the U.S. by freelance workers.
Ultimately, overseas outsourcing benefits businesses by streamlining production, lowering costs, and providing opportunities for economic growth by naturally creating new positions that are best filled within the U.S. New York Times’ Thomas Friedman’s study on overseas outsourcing to India (Is Job Outsourcing Good or Bad for Developing Countries?) shows that it is mutually beneficial to both American companies and those receiving the outsourced workload.
|Total number of U.S. jobs offshore outsourced in 2013||2,637,239|
|Percent of CFO’s surveyed who said their firm was currently offshore outsourcing||36 %|
|Percent of CFO’s who favored India for outsourcing||26 %|
|Percent of CFO’s who favored China for outsourcing||18 %|
|Offshore Outsourcing By Sector||Percent of Companies|
|I.T. Services||43 %|
|Call or Help Centers||12 %|
|Reasons Why Companies Outsource (Multiple Answers Allowed)||Percent|
|Reduce or control costs||44 %|
|Gain access to I.T. resources unavailable internally||34 %|
|Free up internal resources||31 %|
|Improve business or customer focus||28 %|
|Accelerate company reorganization / transformation||22 %|
|Accelerate project||15 %|
|Gain access to management expertise unavailable internally||15 %|
|Reduce time to market||9 %|
Originally published on the Zealousness blog in 2015. Revised and updated in 2022.
Read more education related articles on Zealousness blog Education – iN Education Inc. (ineducationonline.org)
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- Handwerker, Elizabeth. 2022. “Outsourcing, Occupationally Homogeneous Employers, and Wage Inequality in the United States.” https://www.bls.gov/osmr/research-papers/2020/pdf/ec200030.pdf.
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